Year over Year

Year over year (YOY), also refered some times, as 'Year on year" is a comparitive measure that studies the financial performance of a company- Whether it is improving, is static or worsening. To properly quantify a company’s performance, it is advisable to compare revenue and profits ,YOY. As for example the third quarter revenues of a company may be compared for the last three years on a YOY basis and reach a conclusion that the revenues have increased for the quarter.

What is interesting here is that the results for one period is compared with those of 'a comparable period' on an annualized basis. This is considered more informative than a month-to-month comparison. Sales, profits, and other financial metrics change during different periods of the year because most lines of business have a peak season and a low demand season. As for example, the sale of cars increase during November, festive season such as Deepavali. Hence a YOY comparison should be made with the November sales of previous years to arrive at an acurate picture. Comparing it with the sales of May or June can be misleading.

Common YOY comparisons include annual, quarterly as well as monthly performance. YOY measurements facilitate the cross comparison of sets of data. A financial analyst or an investor can compare years of first-quarter revenue data and quickly ascertain whether a company’s revenue is increasing or decreasing. By comparing the same months in different years, it is possible to draw accurate comparisons despite the seasonal nature of consumer behavior.

If an investor looks at a retailer’s results in the fourth quarter versus the previous third quarter, it might appear that the company is undergoing unprecedented growth while in reality seasonality has played a role (peak holiday shopping season happens in the fourth quarter of the year). Similarly, a comparison of the fourth quarter with the following first quarter may give the impression of a dramatic decline, when this could also be a result of seasonality. YOY comparison gives the accurate picture and is also valuable for investment portifolios, enabling investors to see how performance changes across time. YOY is commonly used to not only compare a company's growth in terms of profits and revenue but also understand yearly changes in an economy's money supply, gross domestic product ( GDP ) and other economic parameters.

Another measurement that is used for comparison is Year to date (YTD). Here, while YOY examines a 12 month change, YTD looks at a change relative to the beginning of the year (usually Jan1st). Ofcourse, you can as per specific need, calculate month over month or quarter over quarter, in the similar way of the computing YOY.

This post is a part of #BlogchatterA2Z 2023